The human rights imperative for financial services: key learnings on risk and opportunity
Financial sector institutions typically consider themselves to be low risk when it comes to human rights issues. While this might make sense from a direct workforce perspective, it ignores the sector’s complex web of customer, investor and supplier relationships that link it to a wide range of potential human rights impacts. In human rights we look at an organisation’s ‘sphere of influence’ to help determine its range of responsibility and opportunity when it comes to impacts on people and their basic rights.
This is a move away from consideration of traditional business risks, which are often mitigated by ring-fencing an organisation’s scope of legal liability. As expectations rise for the financial services sector to address non-financial risk, it has become increasingly pertinent for financial services organisations to take a rights-based approach to managing their human rights risks and impacts.
The last decade has made it clear that there is both a moral and business case to enhance human rights. We have seen numerous examples that show how failure to manage human rights risks and impacts can lead to reputational damage, loss of trust, divestment by investors and significant financial cost. More recently, we have also seen ESG move from being solely about “doing good” to be a key driver of value and opportunity.
In this rapidly changing global context, my work with financial sector institutions in the field of human rights has revealed some key risks and opportunities for the sector moving forward. In this article I distil the learnings into three overarching themes:
- The world is rapidly changing, and the financial sector can’t afford to be left behind.
- Moving forward starts with putting people at the centre.
- It’s not just about risk, it’s also about opportunity.
The world is rapidly changing, and the financial sector can’t afford to be left behind
Today’s rapidly changing global context has put the role and responsibility of financial services organisations in the spotlight. The recent Australian Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission) brought into sharp focus the importance of public trust and effective management of non-financial risk. The cascading of human rights reporting requirements into domestic legislation around the world makes it clear that director accountability for non-financial risk is not going away. Investor support for human rights disclosure is rapidly increasing and scrutiny of Environmental Social and Governance (ESG) reporting continues to grow and mature. Currently, we are in a transitionary phase with respect to the social aspects of Environmental, Social and Governance reporting.
At the same time, the global COVID-19 pandemic is continuing to exacerbate existing vulnerabilities and create new ones, and accelerated digitalisation is often coming at the expense of the most vulnerable. While digital communication technologies and artificial intelligence present great opportunity, their risks need to be intentionally considered to prevent unintended harm.
These trends point to one overarching learning: this is a critical time for businesses to enhance human rights awareness and performance.
Financial sector executives often ask me what human rights have to do with their business. The question stems from a long-held belief that the sector is low risk because it is removed from the (often literal) coalface of human rights abuse. In their view, human rights issues are material for the mining or apparel sectors and for businesses that manufacture goods using raw materials from high-risk geographies. It is often the perception of FS sector organisations that other priorities are more pressing – particularly with regard to data security and technology and regulatory change as a result of the Royal Commission.
Compounding this rationale for de-prioritisation is that the corporate responsibility to respect human rights was formalised relatively recently. This formalisation happened in 2011, with the global community coming together to develop the United Nations Guiding Principles on Business and Human Rights which explicitly recognise the responsibility of business to address and mitigate human rights risks and impacts.
These two factors have meant that many organisations in the sector have not yet updated their thinking and practice on what it means to cause or contribute to an adverse human rights impact, and how their level of influence determines risk mitigation and remedy. Financial sector institutions are only now starting to make the shift in thinking from a traditional risk-to-business approach to an approach that puts risk to people at the centre of their risk management efforts.
Moving forward starts with putting people at the centre
The sphere of influence lens reveals that the financial sector’s reach into and across complex investment, customer and supplier relationships means that financial institutions are exposed to a range of human rights issues. This can be either through direct contribution to practices that cause harm, or indirectly through provision of support or funding to organisations whose practices are associated with harm to people.
Activities such as expansion into new markets and acquisition of entities in new operation regions can expose firms to potential human rights issues and legislative requirements that they had not previously considered. Financial institutions can also be connected to human rights abuses where they lend to, or insure, businesses that perpetrate, rely on, or benefit from, human rights abuses in their supply chains. Providing project finance for a construction project that engages in land grabbing or uses forced labour, and business relationships such as corresponding banking partners or payday lenders for a bank can also be a source of risk.
Once financial sector organisations acknowledge that every business, partnership or sourcing decision involves significant questions about potential human rights issues, the focus appropriately becomes risk-based mitigation of harm.
A human rights lens prioritises due diligence actions from the perspective of greatest risk of harm to people. Financial sector organisations first need to gain visibility of the potential human rights issues in their sphere of influence to then develop practical ways to prevent and address them. After that, it’s about taking intentional steps to get your organisation’s house in order by ensuring to the greatest extent possible that your operations and supply chain activities are not causing or contributing to harm.
In a nutshell, this means taking the following foundational steps:
- Gain a comprehensive view of potential risk of harm to people across global operations and supply chains, including working conditions of employees, partners in the global value chain, customers acquiring project financing, loans, asset-management services, acquired businesses or activities in new global markets and regions. Organisations can do this by conducting or commissioning a human rights risk identification exercise. KPMG Banarra’s human rights specialists, for example, help organisations identify areas in an organisation’s operations or supply chain where there is a confluence of human rights risk factors.
- Set up a cross-functional working group that includes customer, compliance, brand, risk, procurement, legal and human resources functions to implement a human rights policy and build human rights due diligence into functional processes to ensure that accountability and responsibility for risk management is embedded across the business. Ensure a clear line of reporting to the board and executive leaders on human rights risks and impacts so that escalations are handled rapidly.
- Build the capability of your people, including by socialising boards and executive leaders to the corporate responsibility to respect human rights and rolling-out business-wide training on human rights training to enhance awareness and challenge traditional assumptions about corporate responsibility.
It’s not just about risk, it’s also about opportunity
In addition to managing their human rights risks, leading financial services organisations are developing whole-of-business ESG strategies to guide investment in the areas where they can have the greatest measurable impact.
The benefit of a whole-of-business-human rights approach is that it enables internal and external congruency. In practice, achieving congruency means that the organisation’s business growth strategy takes account of potential risks to people at the same time as it identifies the areas the organisation can contribute positively to society by supporting human rights and the UN Sustainable Development Goals. It involves crafting an ESG framework that is driven by and integrated with human rights commitments. This approach allows an organisation to demonstrate integrity to a market that now explicitly demands it.
While risk management maturity and social impact investment cannot offset each other, they can certainly enhance each other. It is this confluence of human rights risk and opportunity that can help the financial sector to not only catch up to global expectations, but lead genuinely sustainable, ethical business practice that contributes positively to society.
If financial sector organisations act on the opportunity they stand to gain the competitive advantage of being truly purpose-led. The commercial benefits of this are clearly established: authentically purpose-led organisations attract and retain talent, gain higher market share and enjoy business and brand sustainability. They also collaborate and innovate to solve complex social problems, moving beyond transactional models of employee and customer engagement to deliver innovative, people-centred products and services.
The transformative power of achieving congruency between risk and opportunity lies in putting people at the centre. With people at the centre, organisations are driven to focus on growing and extending their positive impact rather than defending the status quo. Who better then to lead a human rights approach to business than a sector that relies on social capital in all its forms to achieve meaningful growth?
Your next touchpoint – whether with client and customer facing teams, transaction and credit, risk, procurement, technology, sustainability or investor relations – is the time to discuss how to manage risk and activate opportunity using a human rights lens. KPMG’s business and human rights specialists can help you understand how to shape your business practice for good.